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Piggy banks | AccountingWEB | What’s ICAEW doing with £100m reserve funds?
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What’s ICAEW doing with £100m reserve funds?

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Richard Murphy discovers a substantial reserve of £100m in the Institute of Chartered Accountants in England and Wales’s recent annual report, largely accrued from fines from its members. He questions the purpose and utilisation of these funds.

17th Apr 2024
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In 2023 I wrote a report that looked at the financial performance of the Institute of Chartered Accountants in England and Wales (ICAEW) over an extended period, ending with their financial statements for 2022.

As a result I suggested that over the period from 2015 onwards the ICAEW had been enriched by £148.6m as a consequence of fines and cost recoveries paid by firms that have failed in the main to undertake audit work to required standards at a resulting cost to the public at large. Of this total figure, £43.8m were cost recoveries in excess of recorded expenditure.

 

As I noted in that report, the ICAEW did suggest that the fines paid were transferred by it to a strategic reserve, although there was no mention anywhere within their financial statements about the existence of such a reserve, or what it might be used for.

Claims of strategic investments

That said, as was apparent from the financial statements as a whole, they did undoubtedly have a strategy. However, why any significant expenditure from reserves would be required to support its delivery was not clear. That was because the strategy in question appeared to relate almost entirely to activities of a routine and ongoing nature that it was already undertaking as a result of its current activities. These strategic goals were summarised under five headings:

  1. strengthen trust in ICAEW chartered accountants and the wider profession
  2. help to achieve the sustainable development goals (SDGs)
  3. support the transformation of trade and the economy
  4. master technology and data
  5. strengthen the profession by attracting talent and building diversity.

In reality these goals are deeply embarrassing, meaning in practice, and in the same order, the following.

  1. We’ll try to stop our members messing up so badly by supposedly reforming audit and corporate governance in the UK, neither of which are within the ICAEW’s remit to change.
  2. We’ll try to work out what accounting for climate change might mean.
  3. We’ll lobby for reform of the public finances, mainly by asking for tax cuts.
  4. We will really try to get our heads around accounting, which we’ve supposedly been looking at for well over a century, but which we now refer to as data processed by technology.
  5. We will try to be less of an establishment club than has been apparent to date.

There is nothing here that will cost anything very much at all, to be candid, and if training is at the heart of some of it, then the ICAEW can charge fees for its supply. 

As a result, I suggested at the time that the ICAEW had, as a consequence of these accumulated fines and cost recoveries, reserves massively in excess of its requirements for any reasonable operational purposes.

As a consequence, I said that it was not functioning within the terms of its royal charter, which requires that it operate in the public interest. I could not then, and cannot now, reconcile the retention of such funds for the above-noted supposed purposes with that obligation.

Use reserve for public-benefit programmes

Instead, I suggested that these fines be spent on two massive public-benefit education programmes. One was to reform the current undergraduate accounting syllabus, which is at present largely shaped by the demands of the ICAEW’s exam exemption requirements, and is far too limiting and intellectually undemanding as a result.

The other suggestion was a £100m programme to fund school education programmes on finance, the need for which has been highlighted in the Financial Times in the past few days. 

I met with Michael Izza, then ICAEW chief executive, to discuss these issues last summer. On the second, school-based proposal he suggested there was no need for this, that others had tried it and that the ICAEW Rise programme does, anyway, meet this need. This is ridiculous, however useful that outreach programme might be.

On undergraduate education, a multimillion-pound bid was made at Izza’s suggestion. It was supported by academics from 19 institutions. We were told in response that a sum of somewhat less than £100,000 might have been considered.

Has anything changed in ICAEW accounts?

In that case I have looked at this year’s ICAEW accounts, published on 16 April 2024 and relating to the financial year to 31 December 2023 with interest.

In fairness, some things have changed. I can find no mention of strategic reserves, for example.

What I can find is very clear evidence that the ICAEW has continued to be enriched as a consequence of these fines and cost recoveries. Admittedly the obvious sums have reduced. The net recovery from penalties and costs is only about £1m in the year, spread over several headings.

However, the ICAEW enjoyed investment returns during the course of the year of £10.4m. Given that the majority of the income in question would have been earned on what the ICAEW describes as its fixed-asset strategic investment portfolio that exceeds £108m in value (with a further £22m of such investments in current assets) it is reasonable to presume that much of this money did not arise as a consequence of anything relating to the ICAEW’s normal activities, but arose instead as a result of these accumulated penalties.

It’s also good to note that the ICAEW has very largely agreed my estimate of these sums. They now say that cumulative fines are £108.1m and cost recoveries are £45.1m after allowing for restatements over time. I think that we have now reached agreement on this issue in that case. 

What’s next for the reserves?

So where does this leave the ICAEW? They now say that their reserves policy is: “Set at a level sufficient to cover both short-term requirements and longer-term investment needs:

  • reserves should be set at a level equivalent to at least six months of expenditure through the income statement, and
  • cash and investment balances should be sufficient to cover at least six months of annual budgeted/forecast gross cash expenditure.”

As they also note: “Reserves are in excess of the minimum required level under the policy at the end of the year.”

This policy would be met by reserves of around £60m. They actually have accumulated reserves of £146m excluding revaluation reserves and dedicated funds. Those accumulated reserves are almost exactly, and not I suggest by coincidence, the sum by which fines and costs have enriched the ICAEW.

In the financial statements there is an opaque statement that offers some suggestion of its intent on this issue: “The ICAEW board has issued direction on the principles to be adopted and applied in respect of how ICAEW’s reserves are used in the public interest and to support the strategy. In September 2023, the board considered a set of possible strategic level investments (including a major review to future-proof the ACA, the Centre for Public Interest Audit, the Centre for Sustainability Management, a review of the role of the profession in AI [artificial intelligence] governance and a modernisation of the Royal Charter) and approved these proposals for further development and discussion at board.”

Nothing I can think of might suggest why these sums might use anything more than a tiny proportion of the available reserves.

Nor do I think the ICAEW has any need to retain six months of reserves, which is a benchmark usually used by major public charities that are heavily dependent on legacy income and voluntary donations to undertake their work – streams which are inherently unreliable. The ICAEW financial position over the past five years has been summarised by them as follows.

Group five year summary from ICAEW annual report
ICAEW Annual Report

Financial instability is not a feature of its performance. But when noting the need for reserves, its deferred income of £43.9m at 31 December 2023 looks to be more than sufficient to cover the stated need, effectively forming a reserve in its own right.

Questions remain

In that case the ICAEW is still sitting on £100m of reserves, however this matter is looked at, which it currently seems to think should be spent on brand development and on funding a couple of minor research centres whose costs could be covered out of current revenues.

So, the question remains – what is the ICAEW going to do to use these funds, secured from its members who had failed the public, to now deliver benefits in the public interest as it is duty bound to do by its royal charter? I would love an answer.

Replies (5)

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By Justin Bryant
17th Apr 2024 13:19

I don't get it. SDT/SRA fines for solicitors go straight to HM Treasury. Why not so with ICAEW?
https://www.sra.org.uk/sra/news/sra-update-105-financial-penalties/#:~:t....

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Replying to Justin Bryant:
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By FactChecker
17th Apr 2024 19:19

I was under the impression that it will start to do so sometime in the near future (sorry can't remember the details), but that's only akin to increasing the height of the wall you share with your neighbour - thus preventing balls from going over.

However that still leaves no apparent plan for the return of all the balls previously kicked over the wall (and currently still being retained by your neighbour - in this case the ICAEW).

Thanks (4)
Replying to Justin Bryant:
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By jamesjcrylatt
18th Apr 2024 19:53

The key difference with the legal profession is that there has been a conscious decision to separate the 'advocacy' and enforcement roles (fulfilled by the Law Society and SRA respectively). The Institute is both a members' society and a regulatory body. That position is looking increasing untenable.

And I'm afraid that we're kidding ourselves if we think that we're dictating the undergraduate syllabus which is far more influenced by the ACCA exemptions which attract international students.

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Replying to jamesjcrylatt:
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By Justin Bryant
19th Apr 2024 10:26

But that distinction alone does not properly explain why there is a difference does it?

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By Arbitrary
19th Apr 2024 16:27

For clarity, I would mention that the Audit Enforcement Procedure investigation fines go to the Treasury and the Accountancy Scheme fines go to the ICAEW. It looks like new investigations will not be under the Accountancy Scheme but there are ongoing ones which may still produce money for the ICAEW. Anyway the absurdity of the ICAEW receiving large sums from the failings of its members seems to have disappeared. The big question is what to do with the money. It has been suggested that those suffering from the audit failings should be compensated, but that will be complicated and I see a Jarndyce vs Jarndyce situation developing. Perhaps the money should be given to persons suffering from the depredations of war.
The ICAEW accounts are rather silent on this subject.

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